Economic truths might be less permanent than mathematical truths, but economic theory was essential for learning what worked, what didn’t, what mattered, what did not. Inflation could lift output in the short run but not the long run. Gains in productivity are the primary driver of wages and living standards. Education and a safety net could reduce poverty without producing economic stagnation. A stable currency was necessary for economic stability, a healthy financial system is essential for innovation. As Robert Solow observed, “The questions keep changing and the answers to even old questions keep changing as society evolves. That doesn’t mean that we don’t know quite a bit that is useful , at any given moment.
Reality has mostly outstripped imagination. Even Schumpeter could not have imagined that the world’s population would be six times greater but ten times more affluent. Or that the fraction of the earth’s citizens who lived in abject poverty would dwindle by five-sixths. Or that the average Chinese lives at least as well today, if not better, than the average Englishman did in 1950…. Remarkably, even the Great recession of 2008 to 2009, the most severe economic crisis since the 1930’s, did not reverse the prior gains in productivity and income. Life expectancy kept going up. The world financial system did not collapse. There was no second great depression.
Madmen in authority from Kaiser to Hitler, Stalin, and Mao have repeatedly tried- and still try- to ignore or even suppress economic truths. But the more nations escape poverty and make their own economic destinies, the less compelling the rationalizations of dictators become.
From Grand Pursuit- The Story of Economic Genius by Sylvia Nasar
This excerpt from Nasar’s eloquent epilogue concluded her tour of modern economics. The development of modern economic thought is two steps forward and one step backward. The backward step is when the rational and the logical meet the reality of history. Those who develop economic theories are in a sense trying to describe a painting that is not yet finished, but the painting that is the history of human development is never completed.
Nasar described the ideas of the great economists in the context of their personal development and perspective, and the history of their time. During the decades of WWI and the Great Depression it would not be surprising that many thinkers would think that capitalism was flawed. But the ensuing collapse of planned economies and the growth fostered in free markets and societies exposed the flaws in Marxism and excessive central planning.
Those brilliant thinkers who seek a unified theory of human behavior, often pursued with a delusional sense of mathematical certainty, are inevitably humbled by the dual human abilities of judgment and change. Just because economics will never be perfected, however, does not mean that it is not a valuable tool. Economists will continue their “grand pursuit to make mankind the master of its circumstances.”